Brotherton & Ors v Aseguradora Colseguros SA & Anor

In this action the Claimants are primary and excess layer underwriters at Lloyd’s and insurance companies carrying on business in the United Kingdom as reinsurers. In this Judgment I shall call the Claimants, collectively, the Reinsurers. The defendants are two insurance Companies carrying on insurance business in Colombia [the Defendants or Reinsureds]. This case concerns the renewal of reinsurance contracts for the year 1997/1998 and the two month further renewal of the contracts from 7 December 1998. The defendants were the insurers of a Colombian State owned bank [Caja de Credito Agraria Industrial y Minero] whom I shall call Caja’ the Bank or the Insured. The reinsurances being renewed were Bankers Blanket Bond and Professional Indemnity reinsurance covers. This reinsurance would cover risks of losses which Caja incurred due, for example, to robberies at branches in rural areas of Colombia, and, subject to certain qualifications which do not arise, losses caused by frauds of employees at the Bank.

The relevant reinsurance contracts were placed in the London market through English placing brokers, Butcher Robinson & Staples International Limited [‘BRS’]. For the 12 month period from 7 December 1997, the primary layer cover was up to a maximum of 5 billion Colombian Pesos each and every loss and in the aggregate, in excess of a deductible of 125 million Colombian Pesos each and every loss. The Brotherton Syndicate No: 490, for whom RGB Underwriting Agencies Limited [‘RGB’] were the managing agents, were the lead underwriters on the primary layer line-slip. Mr Satterford wrote the risk in November 1997 and agreed the two month extension. Some of the followers on that slip had separate presentations before taking a line, some simply accepted a line without a separate presentation. There was an excess layer for the same periods up to a maximum of 30 billion Colombian Pesos each and every loss and in the aggregate in excess of the Primary Layer. The brokers [BRS] made separate presentations to each underwriter on the excess layer.

The background circumstances leading to the present claim are succinctly summarised in a judgment of Mance LJ in the Court of Appeal:

“3. The reinsurers, Peter Malcolm Brotherton and other London insurers, are claimants in the proceedings. They seek declarations that they have validly avoided primary and excess layer reinsurances made in late November 1997 incepting 7^th November 1997 [sic] and extended in late November 1998 until 31^st January 1999. The reinsureds, Aseguradora Colseguros S.A. and La Previsora S.A., Compania de Seguros, are Columbian insurance companies. They issued bankers blanket bond and professional indemnity insurance policies to a Columbian state-owned bank, Caja de Credito Agraria Industrial y Minero ("Caja Agraria"). The policies covered, among other matters, losses caused by dishonest or fraudulent acts of bank employees, subject to qualifications which it is not here necessary to examine. Caja Agraria's president until his suspension in early November 1997 was S. Benjamin Medina.

4.

Between 28^th January 1997 and late November 1997 seven news bulletins and fifteen newspaper articles (including six in El Tiempo said to be Columbia's largest circulation newspaper) carried reports of allegations of misconduct and related investigations involving Caja Agraria's business and S. Medina's conduct thereof. These culminated with reference to his suspension for 90 days in early November 1997. In January and February 1998 there were further reports of such investigations, including disciplinary charges by then formulated against S. Medina and other bank officers.

5.

Reinsurers plead (in paragraph 6 of the claim) that as a result of such reports both reinsureds, prior to entering into the contracts, knew or ought to have known that serious allegations of corruption and embezzlement of public funds had been made against S. Medina and other serious allegations against other officers; that these included allegations of irregular loans; that such loans were being investigated by the Contraloria General; that S. Medina's involvement was being investigated by the Procurador General de la Nacion; that the Procurador General had ordered S. Medina's suspension on or about 4^th November 1997; and that in early November 1997 he had been served with an arrest warrant by the police to comply with a court order to produce evidence in a criminal investigation by the Fiscalia General de la Nacion into corruption or embezzlement of public funds within Caja Agraria. As from February 1998 reinsurers also allege that the reinsureds knew or ought to have known that the Procurador General had brought disciplinary charges against S. Medina and other bank officers. Further, they allege that, at the time of placement (presumably also including the extensions) the reinsureds had no knowledge and no means of proving to reinsurers' satisfaction that the allegations were untrue, or that claims would not arise out of the allegedly irregular loan transactions.

6.

Reinsurers' case is that the reports alone, and all the more the reports coupled with the fact of the investigations, were material to be disclosed, firstly as constituting circumstances which might give rise to claims under the reinsurances, and secondly as suggesting moral hazard. For completeness, I note that the lead reinsurance syndicate also asserts that positive misrepresentations were made to it in November 1997 as to the reasons for S. Medina's non-attendance at a meeting in London and for his suspension.

7.

The reinsureds in their defence admit the reports (although not the accuracy of the summary in paragraph 6 of the claim). They also admit the investigations, including the arrest and charges. It is not their case that the reports were as reports false. They make no admission that they knew or ought to have known of the reports or other matters which reinsurers allege should have been disclosed. But they admit that they could not at placement have demonstrated unequivocally that there was no proper basis for the investigations (a word which I will in this judgment use to include the arrest and later the charges), although they assert that they could have demonstrated their political motivation and that their mere fact was not a reliable basis for any views about S. Medina's veracity or the regularity or otherwise of the loan transactions. They also assert that the lead reinsurance syndicate (through Mr Satterford) knew or ought to have known of the allegations (although they do not suggest that any such knowledge on its part would fall to be attributed to following reinsurers).

………….

9.

The forthcoming trial will on any view have to address the following issues:

i)

whether, as at the time of the placements in November 1997 (or, as the case may be, the extensions in November 1998), the reports (or the reports coupled with the fact of the investigations) were or ought to have been known either to the reinsureds or to all or any of the reinsurers;

ii)

whether, at that time, their mere existence constituted a matter which a prudent reinsurer would have regarded it as material to know. On that issue expert underwriting evidence will, in accordance with modern practice, be admissible; the issue will raise for consideration whether the reports (or the reports and investigations) amounted to intelligence, or were mere "loose" or "idle" rumours;

iii)

whether, if the actual reinsurers had known of the reports (or the reports and investigations) at that time, such knowledge would have induced all or any of them to act differently, either by not entering into (or extending) the reinsurances, or by only doing so on different terms (including a different rate); some light may be thrown on this by the answer to (ii), but the evidence of the actual reinsurers is likely to be more important.”

The issue in the Court of Appeal was whether the Colombian Insurers were entitled to adduce evidence as to the truth of the media allegations. The Court dismissed the Insurers’ appeal against the judgment of Moore-Bick J. who had rejected the Reinsured’s case, and struck out the paragraphs of the Defence by which they denied that there had been any actual misconduct by officers of the Bank. Mr Millett QC has told me that permission to appeal is being or about to be sought from the House of Lords, after permission was refused by the Court of Appeal. I have to say, for what it is worth, that I regard it as blindingly obvious that the fact that an allegation of misconduct against the President of the Insured has been made is a potentially material fact quite independent of the truth of the contents of the allegation. In any event, in this case, Mr Medina remains suspended whilst the official investigations are pursued. Furthermore, the right of the Reinsurer to repudiate liability (and rescind the contract) where there has been a material non-disclosure or misrepresentation cannot be made susceptible to some kind of ‘equitable’ or ‘hardship’ criterion, which entitles the Reinsured to adduce evidence as to matters not known at the time the decision to rescind was taken. The contracts were avoided on 21 September 2001.

The Reinsurers also say that the matters relied upon and summarised in the judgment were matters which the Reinsureds’ producing brokers knew or ought to have known at the time of placement and extension. Further, the Reinsurers rely upon an express misrepresentation which they say was made to Mr Satterford at the pre-placement meeting in London in November. The allegation is that Mr Satterford “raised an inquiry as to why Benjamin Medina had not travelled to London to attend the meeting personally. He was told by the Defendants and/or their agents that Mr Medina was tied up in Colombia dealing with the affairs of the bank.” It was further pleaded that in late November 1997 Mr Stewart Brown of BRS informed Mr Satterford

“that Benjamin Medina had been suspended from Caja .. but said he was under suspension because he had been accused of having taken a single flight at Caja[‘s] … expense, when he was travelling on family matters as opposed to travelling on Caja[‘s] business matters.”

It is further alleged that Mr Brown told Mr Satterford that this was an isolated allegation against Benjamin Medina and that it was nothing more than stupidity on his part. Thus the lead syndicate say that the true reason why Mr Medina was unable to come was not revealed and the lead syndicate were led to the belief that the reason for the suspension was immaterial to the risk being placed and that the Reinsureds never disabused the underwriter of that belief at any subsequent stage “not even at the time when the extensions were being broked”. Thus they say that they were misled by a material misrepresentation and induced to write the business and the extension by reason of it. They say that the reason why Mr Medina was suspended was to do with his alleged involvement in unauthorised irregular bank loans and not just because he had used the company aeroplane for his own personal use on one occasion. The reports referred to particular loans and particular beneficiaries involving named officers and named branches, which exposed the bank to losses of 11 billion pesos. Mr Medina was reported to have been subject to official investigations, suspended and arrested.

The Reinsureds’ case is that they did disclose to the lead underwriter that Mr Medina’s suspension was due to the accusation that he had used an aeroplane owned by Caja for his own private purposes and that these facts were disclosed to Mr Satterford

“orally at a broking meeting in London in early November 1997 at which Julio Arciniegas [of the producing broker] and Jairo Meija of the First Defendant [Colseguros] were present. The disclosure followed a request by Mr Satterford as to why Snr Medina had not travelled to London to attend the meeting personally.”

The basis upon which it is pleaded that none of the allegations about Mr Medina and other senior officers at the bank had to be disclosed by the Reinsureds to the Reinsurers is that

“if the matters alleged were matters known to the Defendants or matters which ought in the ordinary course of business to have been known by them (which is not admitted) then these were matters which were either matters of common notoriety or knowledge or were matters which the Reinsurers ought in the ordinary course of their business to have known.”

This averment is supported by particulars of the matters relied upon. I summarise them thus:

(1)

Mr Satterford was one of the leading reinsurance underwriters of Colombian banking and financial risks in the London market; he frequently spoke to local producing brokers and had frequent contact with the main ceding companies;

(2)

he frequently travelled to Colombia on business trips and met many banks, including Caja, who were the original assureds and he knew Mr Medina personally;

(3)

Mr Satterford used a Bogota branch of a loss adjusting company; and employed the services of Risk Concepts Limited [‘RCL’] to perform regular audits at various Colombian Banks, including Caja, and “it is to be inferred that [the local loss adjusters] and/or RCL knew the contents of the press reports relied upon ..”;

(4)

Mr Satterford’s Agency subscribed to press materials from Latin America in order that they could keep abreast of events in the Colombian market and in particular they subscribed to Latin America Newsletter.

Each of the primary and excess layers policies contained a Discovery Limitation Clause – a standard London market clause:

“There shall be no liability in respect of any claim:

Section 18(3) of the Marine Insurance Act 1906, provides, so far as is relevant to this Action, the following:

“In the absence of inquiry the following circumstances need not be disclosed, namely:-

….

(b)

Any circumstance which is known or presumed to be known to the insurer. The insurer is presumed to know matters of common notoriety or knowledge, and matters which an insurer in the ordinary course of his business, as such, ought to know.”

When opening his case, Mr Millett QC, on behalf of the Reinsureds, identified five issues:

Mr Swainston QC on behalf of the Claimants identified what he submitted were just three issues:

I must decide between these two extremes.

The evidence of fact, which I received, came from the following witnesses on behalf of the Claimants:

For the Reinsureds, the evidence of fact came from the following:

As foreshadowed by Mance LJ, each party called an expert witness to deal, primarily, with materiality and inducement and what should have been disclosed. Mr Outhwaite was the expert retained by the Defendants; the Claimants instructed Mr Newman on behalf of the Reinsurers. I am grateful to them both for their help.

Under Colombian law an insurance risk arising in Colombia must be insured through a Colombian Insurer. Colseguros had for some years been Caja’s only or principal insurer. Reinsurance cover was regularly obtained through the London market. It must have been Colseguros’ choice whether or not to retain any part of the risk themselves. In fact they chose to retain none of the risk. In those circumstances, the London reinsurance market played a more direct part in the insurance and reinsurance arrangements than otherwise would be the case. However, the structure of the insurance arrangements is clear. Colseguros and the other Colombian Insurer wrote the risk which was placed through Caja’s Colombian brokers, Aseguros. I accept that when the risk was written by the Colombian Insurers, they did not rate the risk, as they retained none of it; but they were paid significant sums by way of premium for acting as insurers. They had a claims handling department and would investigate claims and report on them in the normal way. Colseguros were closely associated with Caja in the sense that their own people investigated at the Bank when a claim had been discovered; in other words they were closely involved in coverage issues. Caja were to set up a security committee on which there would be a representative of Colseguros and the Colombian brokers; the purpose of which I infer was an attempt to reduce Caja’s exposure to risks identified by RCL. Reinsurers, who bore all losses within the policy, would appoint loss adjusters in respect of the larger claims. I think that Mr Head’s company was the leader for the 1994/5 year; Mr Satterford took the lead for the 1995 renewal and for the 1996/7 year of account. When the reinsurance was broked into the London market in 1997, the formal position, in order, no doubt, to comply with Colombian Law, was that the Insurers instructed Lloyd’s brokers, BRS to present the risk on their behalf. BRS would take their instructions from the Reinsureds and be provided with relevant material relating to the risk by them. In fact, Aseguros, Caja’s brokers, also acted on behalf of the Defendants in procuring the reinsurance. Thus, Aseguros acted both on behalf of Caja and then on behalf of the Defendants, although the reinsurances had to be broked by a Lloyd’s broker [BRS]. Because the Reinsurers accepted the whole of the risk their relationship with the ultimate Insured [Caja] was closer than it otherwise would have been. Thus the Reinsurers were directly concerned to ascertain whether the risks identified by the Risk Consultants, who were paid by Caja but probably appointed by Reinsurers, had been sorted out. It was usual practice, therefore, for the presentation to the lead reinsurance underwriter in London to be made by a team from Colombia, which included representatives from Caja, Aseguros, and the Colombian Insurers. As Mr Satterford puts it:

“Unlike some Cedants, who were happy simply to act as fronts, Colseguros as a company liked to be directly involved in the placement process, and a senior executive of Colseguros would almost always attend renewal meetings if the Original Insured was (as in this case) a major client. Often this would be Colseguros’ reinsurance manager, sometimes (as in this case) a more senior figure.”

It is common ground between the parties that there was a duty on all the people present from Colombia to disclose facts material to the writing of the risk, starting with the Bank and working up through the chain: see Day 6 page 18 lines 17 – 22.

I now turn to the question as to who knew what immediately prior to the presentation on 17 November 1997. The participants at that meeting were:

I start with Mr Satterford. He had travelled to Colombia three times in 1997 [in April, May and October] prior to the meeting in November. His employers had access to certain published material such as news letters published in the UK and covering Latin America. He said that before the meeting he did not know of the suspension of Mr Medina and the reasons for it. The only evidence given to a contrary effect was from Mr Brown. But as I have indicated, I do not regard Mr Brown’s evidence on this point as reliable. The only disclosure relied upon by the Defendants in their pleading is an alleged disclosure at the meeting itself. It was not suggested or pleaded that Mr Satterford had been told of the suspension before the meeting. There is no record kept by Mr Brown to show that this had been made known to the underwriter. If Mr Brown had been told of a suspension of the President of the Insured, and if, as he did, he regarded that as of significance to the risk his company were broking he surely would have recorded this in writing. Furthermore, a written note would have been all the more necessary if he personally did not attend the meeting but relied upon his colleague Mr Cuthbert. Further, according to his evidence, he was told that “the bank were sending over Patricia Cruz and William Ospina to explain the situation”. Yet there was nothing in the written material prepared by the Bank and their agents for the presentation which related to the suspension. Mr Brown must, therefore, have been aware of the need to put something in writing about the suspension, if in fact he had been told about it. If Mr Satterford had been made aware of the suspension before the meeting, one might well ask why he should have asked why Mr Medina “had not travelled to London to attend the meeting personally.” [see paragraph 8 of the Re Re Amended Defence, the final version of which was served in the week before the trial]. Finally, had Mr Brown acted as he said he did, then I cannot understand how BRS failed to disclose the fact to those following underwriters to whom separate presentations were made. In order to make his case more credible, Mr Cuthbert then suggested for the first time that he had told Mr Sharp of the suspension. But this evidence was not credible and he plainly had never told the defendants of this surprise early enough for them to cross-examine the following underwriters about it. For these reasons I reject the suggestion that Mr Satterford knew about the suspension before November 17. He was surprised that Mr Medina had not come and wanted to know why. Mr Mejia’s belief that Mr Satterford already knew about the suspension was simply reconstructed on the basis of Mr Brown’s witness statement. Whether Mr Mejia was being deliberately dishonest in his evidence on this point, I am not sure. If, as I conclude, Mr Brown had not told Mr Satterford of the suspension, Mr Mejia’s evidence cannot be accepted on this point.

I turn next to the two representatives from Caja. It is inconceivable that they were unaware of the suspension of the Bank’s President and of the allegations which were being made against him, including the aeroplane and the improper credit advances. Since January 1997 there had been reports of improper advances being made and a figure of 11 billion pesos was mentioned. There were reports that five employees who had refused to sanction the loans had been dismissed. It was also alleged that Mr Medina had himself asked the Banking Superintendent and the Fiscalia to investigate the irregularities. There was a TV broadcast on 25 July 1997 to the effect that charges had been drawn up against the four most senior directors of the Bank and mention was made of loans made without adequate security, the use of a private aeroplane and the renting of property never used by the Bank. On 4 November Mr Medina was suspended, and the various reports from El Tiempo show the picture thereafter. Mr Medina is still suspended. Whether or not the allegations are true, the two representatives of the Bank must have known of them of their own personal knowledge, let alone on the basis of the press reports. In fact, Ms Cruz was herself suspended at the beginning of the following year having reportedly been under investigation since July 1997 [see the El Tiempo article for 26 July 1997]; and Mr Ospina was head of internal security. Both were senior officials of the Bank.

As for Mr Arciniegas and Mr Mejia the position seems to me to be as follows. Without any contrary evidence, on a balance of probabilities I am prepared to infer that the broker was aware of the suspension and the reasons for it when he arrived with the Bank representatives from Colombia. This ‘team’ were staying in the same hotel in London. Mr Arciniegas must have known, both because of his contacts with the Bank and because of the reports in the media. Although very suspicious of his alleged ignorance, I am prepared to accept that Mr Mejia did not know of Mr Medina’s suspension or the reasons for it before his arrival in London. He had travelled to Europe some ten days before the presentation and before arriving in England. In London, he stayed at the same hotel as the rest of the ‘team’. In the period immediately before the presentation, the media had been full of reports of Mr Medina’s suspension and his arrest. He had been replaced as head of the Bank. Everyone from Colombia would have known that Mr Satterford would want to know why Mr Medina was not present. They knew that he knew Mr Medina [they had met twice in Colombia] and that the two of them had discussed in the past the risks identified in earlier RCL reports. On that Sunday, I am quite sure that Mr Mejia would have learned of the suspension and the reasons for it, because he would have been told by the Bank’s representatives or by the broker. They must have discussed, before the meeting, what they were going to tell Mr Satterford when the inevitable question was asked. Therefore, I conclude that the overwhelming probabilities are that by the time of the meeting everyone from Colombia knew of the suspension and the true reasons for it.

What happened at the meeting? It is common ground that Mr Satterford asked why Mr Medina had not travelled to London to attend the meeting personally. The team from Colombia knew the true answer to this question which was that he had been suspended from duty due to an incident of misuse of the aeroplane and credit irregularities involving a potential loss of some 11 billion pesos, and that he had been arrested by the police and held in custody for a short period. Somewhat curiously, it is the Defendants’ case that the answer given to Mr Satterford’s question was only partially true: namely that his suspension was due to the use by him of the company aeroplane for his own private purposes. Mr Satterford says that he was simply told that Mr Medina was tied up in Colombia dealing with the affairs of the Bank. Who is telling the truth? On this issue, it is pertinent to observe that on their own case, the Colombian team gave a misleading answer, which they must have known was not the complete truth. If, as I believe probable, the team had discussed between themselves what would be said to Mr Satterford when, as they anticipated he would, he asked the question about Mr Medina’s absence, then I conclude that the answer to the question was deliberately misleading, rather than just a casual response. Since they did not tell any of the following market to whom presentations were made that Mr Medina had been suspended, let alone for what reason, it seems to me that the team was of the view that as little as possible should be said about the suspension. Mr Mejia told the court that what was said to Mr Satterford “was enough for him to know and if he wanted something else he could have enquired” [Day 4 page 52 lines 2-6]. He simply had no answer to the question why the following market was told nothing about Mr Medina’s suspension.

In my view Mr Satterford’s recollection is probably correct. Had he been told at the meeting of the partial reason for the suspension I think he would have asked for more information. As he said in his evidence:

“If I had been told in the process of a renewal presentation that the president of a bank had been suspended I would undoubtedly have asked questions. I would undoubtedly have made notes. I did not. Therefore, I do not believe that I was told in that meeting.”

He also said, and I accept, that if Mr Brown had told him whilst he was at the box, he Mr Satterford would have made a note and probably asked questions. If Mr Satterford is right, then at least it is possible to understand the thinking behind the approach of the Colombian team: namely to say as little as possible about Mr Medina’s absence and to dismiss it as of no consequence. That would explain why it was not felt necessary to say anything to the following market: having decided not to disclose that Mr Medina had been suspended, there was nothing to say to the others who were not expecting him to be in the UK and who had not met with him before. But on any view, even on the Defendants’ own case, what was said to Mr Satterford was simply not enough. Fiddling one’s expenses on one occasion is one thing; being suspended for involvement in improper credits involving billions of pesos is quite another. In the latter case, the Reinsurer would or might take the view that there was a moral hazard and the risk of a substantial claim in due course.

As indicated, I reject Mr Cuthbert’s evidence that there was any mention of Mr Medina’s suspension to any of the following market. Further, Mr Cuthbert’s recollection in the witness box that the Colombian team had told him there was a ridiculous accusation against Mr Medina that he had taken a private flight around December last year, that he had been suspended but that “they expected this situation to be resolved”, is probably not true. For present purposes I do not need to be concerned with what the Colombian team may have told their Lloyd’s brokers. If Mr Cuthbert knew about the aeroplane and the suspension in relation to it, then he should have said something to correct what the Colombian team told Mr Satterford, namely that Mr Medina was tied up with the Bank’s affairs. Further, had the question of suspension been raised at the meeting, I would have expected Mr Cuthbert to have made a note of it on the presentation documents which he did use as a note pad during the meeting, but which contains no reference to Mr Medina’s absence or suspension. It seems to me clear that there was both non-disclosure and misrepresentation at the time of the 1997 renewal.

What happened after the meeting, in 1997? In his witness statement, Mr Satterford said that he remembered that he had bumped into Mr Brown of BRS, probably in the street, when the latter said to him:

“words to the effect that Caja .. was having a change at the top, and that Benjamin” .. was under suspicion as a result of allegedly taking a plane flight for his own use. As it was presented to me, this was an isolated allegation that [Mr] Medina had done a foolish thing on a single occasion.”

He said that he was reasonably sure that the conversation took place after inception of the 1997/8 reinsurance. As I read that statement I took him to mean that the conversation took place after 7 December 1997 [in fact, Mr Satterford’s final scratch was put on the slip after inception on 23 December 1997, but by then the Syndicate was already bound]. The pleaded case was that this conversation took place “in or about late November 1997” [paragraph 11.1 of the Re-Amended Particulars of Claim]. In other words, there is a conflict between the witness statement and the pleading as to the date when the conversation took place. This discrepancy has, in my view, more relevance to the issues of inducement and materiality than to the truth of Mr Satterford’s evidence. Whichever date is right, it occurred after the presentation meeting, and not before it, as Mr Brown says. It may be that Mr Brown has convinced himself that he spoke to Mr Satterford about the suspension before the meeting. As I have explained, I am not convinced by his evidence on that point. Whether before or after the risk incepted, but after the presentation meeting, I accept that Mr Satterford was told, on a casual and unplanned basis, that Mr Medina had been replaced. Despite Mr Swainston QC’s re-examination, I think Mr Satterford remained of the view that his conversation with Mr Brown was on or after December 7. The reason why Mr Satterford did not follow this up was partly because of the circumstances in which he was told, namely during a purely casual encounter, and partly because of what he was told. Mr Cuthbert, although wrong about what was said at the presentation meeting, said that he was told by the Colombian team that Mr Medina’s suspension was ridiculous. He may be right that he learned this after rather than before or at the meeting. It would certainly fit with Mr Brown’s perception that there was nothing serious about the aeroplane incident. This explains why he did not chase the matter up. He was properly pressed about this by Mr Millett QC. Leading counsel’s attempt to categorise what he was told as a “matter of grave significance” misfired. It all depends. If Mr Medina thought he was entitled to use the plane on that journey at company expense, because, for example, the occasion was mixed business and pleasure, but acted in breach of the Bank’s internal procedures that would not be a matter of grave significance. I am satisfied on a balance of probabilities that Mr Satterford, and indeed BRS generally thought that the incident for which Mr Medina was suspended was, to use Mr Cuthbert’s expression, based on a ridiculous allegation and that the issue would shortly be resolved.

RCL made a report in September 1998. Mr Satterford had not asked them to look into the suspension of Mr Medina because he cannot have thought it was important enough for them to look into. He wanted RCL to review the security and control systems of the Bank. I think that Mr Satterford knew that Mr Medina had been suspended, because of what Mr Brown had told him. He did not know that he had been sacked and did not know whether he had been re-instated. At the time of the extension Mr Satterford knew nothing further than there had been one isolated incident over the actions of Mr Medina. He knew that there was a new president in harness and what occupied his attention was the increase in losses over the previous year and the question whether the controls were adequate and whether RCL’s recommendations had been complied with. There was a meeting with Caja and the brokers [both Colombian and BRS] on 10 September 1998 at which it was noted that there had been a recent increase in “hold up losses in various remote branches of the bank” which had caused “tremendous problems in the market place with numerous underwriters insisting upon a full review of their security”.

“It was further explained that the market had been insuring the bank and that whilst some three years ago due to the survey which had been conducted by RCL the loss record had reduced, unfortunately the last two years have been disastrous and this could not continue”.

RCL were due to re-survey the Caja on 15 September and it was agreed that the Bank’s representatives would travel to London in the week commencing 28 September with a view to considering the cancellation and replacement of their existing policy. The Bank were to prepare their own report summarising their efforts to control and reduce the losses. Mr Satterford had seriously considered avoiding the policy as a result of an alleged non-disclosure in relation to a particular claim. He cannot recall precisely why the avoidance issue was not pursued at that time, although a sense of loyalty to Colseguros was an element.

Under cover of a letter from BRS, Mr Satterford was sent the RCL review. This review made clear that there was a risk that Caja would have to close if the financial structures within the Bank were not “revamped” and its loan portfolio and profitability not “strengthened”. The report also noted that “the authorities have publicly announced that Caja has recently installed a new President as of September 1998”. This last piece of information was not a shock to Mr Satterford as he was aware that there had just been a change of Government in Colombia. He accepted the suggestion made to him that on the basis of this report any underwriter would assess this as an “extremely suspect risk”. There was probably a further meeting with the new President of the Bank in Colombia in November. But on 23 November 1998, Aseguros wrote to BRS informing them that the Bank did not consider it appropriate to travel to London “at this time” and it requested a two month extension of the current policy. Mr Satterford was confused by this development. First there had been a possibility of a repudiation of the policy due to non-disclosure; then there was the possibility of an agreed cancellation with a new policy being on offer but on terms to be negotiated and agreed, and then the suggestion of a two month extension. He wrote to the Lloyd’s brokers asking what was going on. He included within his response the sentiment that the risk was “a heap of dross”. He believes that he told the brokers that he would not consider a two month extension but subsequently changed his mind and scratched agreement to the extension by an endorsement dated 25 November 1998 to take effect on 7 December 1998. The extension was subject to the implementation of RCL’s recommendations within a time scale to be agreed by 7 January 1999. He was about to cancel the extension at the end of December, because of Caja’s apparent inability to comply with the implementation condition but recanted and allowed the extension to run its full course. He considered that he had power to agree to the extension without reference to the following market because of the ‘leader clause’ in both the primary layer and excess slips. It is clear that at least one of the followers considers that Mr Satterford did not have the right to bind his following market, but, for the purposes of this case, that dispute need not occupy the court’s time. Mr Satterford knew of the suspension of Mr Medina but made no attempt to find out more.

It is somewhat odd, I think, that Mr Satterford cannot remember why he changed his mind from rejecting the idea of an extension and then accepting one. That change occurred over a short period of time: a matter of a few weeks. He accepted that ‘loyalty’ may have been a factor. Mr Millett QC suggested that he saw this as an opportunity to get some premium income in a very soft and competitive market. Before dealing with this suggestion, which is relevant both on the materiality question and on inducement, it is necessary to make some findings about Mr Satterford’s approach to underwriting, and his reputation in the market place, against the background of the state of the Lloyd’s insurance market.

Mr Satterford had a good reputation in the market as an experienced underwriter in the Banker’s Blanket Bond sector and the insurance and reinsurance of banks and other financial institutions. He was known and respected for his judgment in writing risks in this sector in relation to South American institutions. He has had considerable experience in this particular field. Although his judgment was respected, the Caja risk on the primary layer had not made a profit since 1994, the year before he joined the Claimants. The market was softening in 1997 as more ‘players’ joined the underwriting pool: there were, thus, more insurers chasing the same amount of business then available in the market, and this pushed the premiums down. Mr Satterford lost his Venezuelan connection to the competition. The syndicate’s premium income was dropping and for the last quarter of October 1997 was below budget. The renewal season at the end of 1997 was quieter than usual. Towards the end of 1998, he was aware that the results for the Caja risk for the 1997 year would be poor and that the 1997 and 1998 years “had been pretty awful really”. The Caja risk was unattractive.

So, why did Mr Satterford write it at renewal in 1997 and extend it for two months in December 1998? And that question is directly pertinent to the issues of materiality and inducement. Mr Millett QC suggests that the underwriting in 1997 was all about trying to maintain premium income and his status in the market as the market leader, and that there was no sensible underwriting reason for extending the cover for two months in December 1998.

Whether strictly to be called materiality, there are really three issues which arise under this heading:

Mr Outhwaite dealt with materiality in this way.

“The prudent underwriter would be aware that newspapers in this country are hardly accurate and unbiased reporters of events: news is distorted, invented and suppressed according to their own agenda. It is my understanding that that would apply in Colombia also and probably, because of the heated political atmosphere that pertains in that country, to a greater extent than in the UK.

That being so I do not believe that any prudent underwriter would have assumed that the reports cited regarding Mr Medina would alone have formed any basis for deciding his attitude to the Caja .. risk. The fact of the newspaper allegations alone, given their source, would not be sufficient. Only if the Defendants knew there was some truth in the allegations or perhaps were unable to demonstrate or satisfy insurers at the time that the allegations were baseless, could they be considered as material and discloseable.” [my emphasis].

Whilst Mr Outhwaite had never led a fidelity risk, nor bound his own line to one, I think that what he had to say on materiality was pertinent, although Mr Newman’s opinion was more soundly based upon considerable experience of this particular market. The reality is that Mr Outhwaite was bound to accept, as he did, that had the allegations relating to the true reasons for Mr Medina’s suspension been disclosed to the London market it would “undoubtedly influence the mind of the underwriter.” On the basis of the passage from his first written report, which I have quoted, I think that he is forced to concede that the material in the newspaper and TV reports was material and discloseable. The reports contained facts which cannot be shown to have been untrue: for example, Mr Medina’s suspension and the reasons for it, his alleged involvement in improper advances to the tune of some 11 billion pesos, the fact that he was being investigated, and had been arrested and released. One has only to look at the nature of the reports and their provenance to see that they cannot simply be dismissed as worthless gossip. And Mr Outhwaite could not properly dismiss them as such. In fact, as he rightly pointed out, the presentation was being made by people who knew the facts to which I have referred, not because of the media reports but because of their employment by or connections with the Bank. Mr Newman’s opinion on materiality is clear and convincing, and I accept it as obviously sensible:

“In my opinion the allegations set out in [the Points of Claim] taken as a whole were very serious and material to the underwriting of the risk and there is no question in my mind that they should have been disclosed to underwriters at the broking of the main policy incepting 7 December 1997. They were facts or circumstances that would if true give rise to a potential claim under “Infidelity of Employees” Insuring Clause 1 of the Policy.”

…

These matters were also, in my view, material to the extension of the 1997 policy, incepting at December 1998. By this time, all of the events … had occurred, including the bringing of disciplinary charges against four senior officials which had taken place after the inception of the 1997 policy.”

It seems to me clear that these matters would or might affect the mind of an underwriter whether in 1997 or 1998. Mr Medina was being accused of corruption and fraud. He was the head of the bank upon whom Mr Satterford and other underwriters were relying for the implementation of RCL’s recommendations for improving the security and controls at the Bank’s branches. If the head of the Bank was misusing procedures, as alleged, then there would or might be a systemic failure, where others were following the President’s example. The accusation was supported by suspension, arrest, and investigation. The fact that four senior executives were subsequently suspended was obviously, I think, further material information likely to affect the mind of any insurer. Effectively, materiality was conceded by Colseguros’ witnesses.

Were the reports “loose” or “idle” rumours or gossip? Plainly not. The reports themselves do not have the appearance of tittle tattle and gossip. The reports or stories are of specific matters involving a suspension of an identified person, the reason for the suspension and the involvement of the authorities. There is evidence to suggest that both Mr Medina himself and the Insurers regarded these authorities as apolitical. There were dates and alleged facts. The reports related to improper advances of a specified amount [11 billion pesos] in respect of a particular location [“Regional Bogota”] which was eventually the subject matter of a claim. The claim was only dropped in the Defendant’s latest Amended Defence, ostensibly because of the Discovery Limitation Clause. Even if one took a cynical view about the quality of news reporting in the Press and Television, whether in Colombia or elsewhere, it would be an extreme position to conclude that everything in the newspapers was wrong or could be dismissed with a pinch of salt. This was reporting of what appeared to be hard fact.

As Mr Swainston pointed out, the opening words of this subsection are “in the absence of inquiry”. When Mr Satterford inquired why Mr Medina had not come to London for the presentation, the team from Colombia must have known that he was unaware of his suspension and the reasons for it. Therefore, there is no room for the statutory presumption of knowledge. Accordingly, the misrepresentation is not affected or excused by the Act. But in any event, the thesis that Mr Satterford should be presumed to know any of the matters relied upon is unsustainable. As a matter of fact, I am satisfied that he did not know of them or any of them. But he is said to be stuck with constructive knowledge for a number of reasons. First, according to Mr Outhwaite, Mr Satterford, as a specialist underwriter of this type of business in Latin America

“as a matter of London market practice would be deemed to know matters of common notoriety or matters which a direct underwriter would be deemed to know in the ordinary course of business.”

I regard this opinion as unsustainable. In a most general sense a London Underwriter ought to know the market in which he is writing business. With modern methods of communication, he can be expected to know more things than 50 or more years ago. But he is based in Lime Street and not Colombia. In order to comply with the law, Colseguros were both formally, and in reality, the Insurer, even if their underwriter played little or no part in assessing the risk. But that does not put Mr Satterford into the position of a local insurer. He is being broked reinsurance at his box in London. To presume that Mr Satterford knew matters which the head of the local insurer was himself unaware of, makes Mr Outhwaite’s opinion on this issue odd, to say the least. And in any event, Mr Outhwaite’s opinion flies in the face of reality. Mr Satterford wrote business in relation to a large number of banks located widely in South America. It is fanciful to suggest that he is deemed to know everything a direct underwriter would be deemed to know in relation to all the risks which were broked to him in the London market. It is true that the local insurer took no part of the risk himself, and that, as a result the reinsurer was more directly concerned with the ultimate insured than otherwise might have been the case. It is also true that he travelled to Colombia two or three times a year and met with the ultimate insureds and the local insurance company and their broker. But this does not make him the direct insurer in fact or in law, and no Lloyd’s broker could possibly think that he was relieved of his duty to make full disclosure when broking the reinsurance in London.

The Colombian Insurers also rely on the fact that Mr Satterford chose or engaged RCL to act on their behalf. It is said that RCL performed regular audits of Caja. Whilst it is true that RCL performed audits, it is necessary to identify their brief. They were not engaged to audit the Bank with a view to detecting fraud by officers of the Bank. Their role was to examine the physical security of the Bank and its branches and the control systems within the Bank, which were designed to prevent abuse and loss. All the RCL reports, I think, made their role explicit. There is no evidence that high level employee fraud was ever on the agenda at presentation meetings, when the various recommendations in the RCL reports were referred to. RCL were there to help to reduce the risk of losses that would hit the policies. Even if RCL happened to discover alleged wrongdoings by the Bank’s President, that did not relieve the brokers on behalf of the local insurers from making proper disclosure of material matters. There was no mention in the reports they wrote about Mr Medina’s suspension; their reports were provided to BRS and they had contact with RCL. The brokers themselves never suggested that they had any knowledge of the suspension of Mr Medina from RCL. RCL were not, in any event, the Reinsurers’ agents. They were formally engaged by the Bank who paid them, although the cost may have been set against the premiums. As to the loss adjusters, it was accepted by BRS that from their perspective there was nothing in the context of loss adjustment which would alert Mr Satterford to fraud on the part of Mr Medina and other senior management. The brokers did not assume that Mr Satterford knew these things: that was not the reason why Mr Satterford was kept in the dark.

The Insurers also say that Mr Satterford’s Agency also subscribed to press material from Latin America and in particular to the Latin America Newsletter. The particular newsletter only carried a story about Caja about 18 months after placement when Mr Satterford was no longer a subscriber to it. Overall, I am satisfied that the Defendants’ case under section 18(3) is not made out.

Mr Outhwaite expressed the opinion that this clause

“has the effect of narrowing the insured’s disclosure obligations since information material to a claim known by the insured prior to inception is dealt with on a contractual basis instead. In other words, there is no requirement for the insured to disclose such information because any claim it is relevant to would not be covered. Effectively, the insurer and reinsured have agreed that such information is immaterial. It is inferred that the matters reported in the media were known by the Defendants prior to inception. They therefore were not required to disclose them to reinsurers. The reinsurers are not liable in respect of the claims arising out of the known circumstances but they are certainly not entitled to void the entire cover on the grounds that the circumstances were not disclosed.”

It seems to me that this opinion does not stand up to scrutiny. The fact that a claim has been made against the insurer which the insurer is confident can be successfully resisted because of a particular clause in the insurance policy, does not, in principle, mean that the insurer is thereby excused from his duty of disclosure. The word “instead” in the sentence quoted from Mr Outhwaite’s opinion, and the sentence commencing “Effectively” simply do not follow from the premise, because the mere fact of a claim may be material for the reinsurer to know. First, there would or might be no certainty that the Clause would produce the result hoped for. It would be for the reinsurer to assess that risk. Second, the fact that the clause will produce success for the insurer does not alleviate the need for disclosure where, for example, the mere fact of the claim produces a moral hazard. As the evidence in this case shows, the fact that the President of the Bank was allegedly involved in the improper credits was itself of importance, regardless of whether the claim could be excluded by the Discovery Limitation Clause. If the President were implicated in serious irregularity, that would or might show a systemic problem with the implementation of the controls systems. In any event, the clause in the insurance policy would be governed by Colombian law and Mr Outhwaite is not qualified to speak as to its legal effect. Further, he was unable to say whether as a matter of English Law, the clause would be effective to avoid claims in relation to related frauds, for example by compatriots of the President. As one witness said, when fraud is discovered by one employee it is likely to provoke an examination of all transactions involving that person, so that the scale of the problem may be much larger than represented just by the one incident. On the wording of the clause itself there are always likely to be cases where knowledge is in issue. As one of the witnesses, Mr Head, put it, this is a general clause and he would have wished to introduce a much more specific exclusion so as to avoid any risk that the matters referred to could hit the policy. In my view, this evidence made good sense. I am confident that Mr Outhwaite’s opinion does not represent the true position in law and brokers should not be misled by it into trying to limit their general duty of good faith when broking a risk. The clause does not restrict the ambit of the Defendants [and their agents] duty to disclose the matters referred to in the newspaper reports.

I take as the test of inducement the judgment of Clarke LJ in Assicurazioni Generali v ARIG [2003] Lloyd’s Law Reports 131:

“It seems to me that the true position is that the misrepresentation must be an effective cause of the particular insurer or reinsurer entering into the contract but need not of course be the sole cause. If the insurer would have entered into the contract on the same terms in any event, the representation or non-disclosure will not, however material, be an effective cause of the making of the contract and the insurer or reinsurer will not be entitled to avoid the contract. Thus I agree with Sir Christopher Staughton, whose judgment I have seen in draft, that, in this context at least, causation cannot exist when even the ‘but for’ test is not satisfied; cf the recent decision of the House of Lords in a very different context in Fairchild v Glenhaven Funeral Services Limited (2002) UKHL 22.”

At this stage, the factual evidence of the underwriter and the other witnesses as to what they would have done had disclosure been made is, necessarily, of a different quality from their other evidence about the facts. There were very good reasons why an underwriter should not have written the risk in November 1997 and then the two month extension in 1998. The business was not profitable; the Bank’s position had appeared to deteriorate between 1997 and 1998; the Bank had not been carrying out RCL’s recommendations; many of the written off loans had been granted in breach of procedures; in certain areas there was “widespread” breaches of procedures. Mr Satterford knew of Mr Medina’s suspension but made no attempt to find out more before he agreed to the extension. As Mr Millett QC fairly pointed out, Mr Satterford had a number of underwriting reasons and opportunities to cease to write the business in 1997 and again in 1998. Thus, he submits, it is odd that some considerable time after the events, the Claimants now say that had they known of the real reasons for Mr Medina’s suspension, and of the suspension of other senior employees they would not have written the risk. I quite see the force of these submissions.

In 1997, it seems to me that Mr Millett has some difficulty in saying that Mr Satterford’s underwriting judgment would not have been affected by news of the true reasons for Mr Medina’s suspension. In the first place, the Bank’s presentation was pitched on an optimistic basis. It was being presented as a fair risk to take. Second, the reason for the non- disclosure, which was deliberate, was because the importance of the true reason for Mr Medina’s suspension was self-evident. They knew that had the disclosure been made the underwriting decision would most likely have been different. The case on inducement is, I think self-evident as at November 1997. And in any event, the case on inducement in 1997 was accepted by the two broking witnesses. I accept that the non-disclosure/misrepresentation induced Mr Satterford to write the line in 1997; if he had known it is unlikely that he would have written the risk at all, for the reasons he gave.

But as at November 1998, the position is somewhat different. Mr Satterford has no clear recollection about the events which led to him agreeing the extension and then agreeing to allow the extension to run its course at the end of the calendar year. But the same concerns that he would have had in 1997 would have been significantly reinforced by the end of 1998 because four other senior representatives had been suspended, including Ms Cruz, who had represented the Bank in November 1997. The hypothesis here is that for the first time Mr Satterford is told the full and true reasons why Mr Medina and the four senior executives were suspended. If, as I believe, he would not have written the business in 1997, then there were compelling reasons why he would not have written the business by way of an extension in 1998. The business was, by then, even more commercially unattractive. I reject the thesis that Mr Satterford at that time would have written the extension, come what may, either in order to maintain his position in the market place or to keep up his premium income. He struck me as a reasonably careful and diligent underwriter. With the benefit of hindsight he might have appeared foolish to have written the extension, knowing what he then did, but that is far from saying that he would have written it at any price. I find that had the truth been told as at November 1998, no extension to the risk would have taken place.

In both cases, therefore, the non-disclosure/misrepresentation was an effective cause of the underwriting.

It is self-evident that when each underwriter in the following market placed his scratch on the slip, to complete it, they made their own underwriting judgment. But the evidence shows, entirely as one would expect, that it was material to the following market that the leader, Mr Satterford, who was known and respected as a leader of this type of risk in this type of market, had accepted the risk for his own syndicate. He negotiated the terms, and any special conditions; he was primarily in charge of dealing with claims and the way he rated the business was also important. Some of the following market had required separate presentations and there was no disclosure to them of Mr Medina’s suspension or the reasons for it. This was material non-disclosure and they are entitled to avoid the policy for the 1997/8 year and their authority to permit the leader to grant an extension was predicated on the basis that there had been a fair presentation both in November 1997 and November 1998. Of course, if there were no policy for the 1997/8 year [as is the case because of avoidance] then there was nothing to extend. In relation to the following market, to whom there were no separate presentations, I am of the view that Mr Satterford’s participation was an important feature of the background leading to the decision to put down their own line. This type of business is relatively specialised and the followers would rely on Mr Satterford’s knowledge and expertise more than perhaps they would in a more general field. The overwhelming evidence was that the following market wrote the risk partly on the basis that there had been a fair presentation to the lead underwriter. This is commercially sensible and, I would have thought, obvious. If Mr Satterford’s participation was voidable because of non-disclosure then that was a material fact which should have been, but was not, disclosed to the following market. This conclusion is entirely consistent with the judgments in three recent cases: Aneco v Johnson & Higgins [1998] 1Lloyd’s Law Reports 565, a decision of Cresswell J which was confined to its own facts; International Lottery Management Ltd v Dumas & Others [2002] Lloyd’s Law Reports 237 at paragraphs 74 – 77 inclusive, per Dean HHJ, sitting as a Judge of the Commercial Court; International Management Group (UK) Limited v Simmonds [2003] EWHC 177 (Comm), at paragraphs 150 – 152. This line of authority has not received the approbation of the Court of Appeal. In the case of Sirius International Insurance Corp v Oriental Assurance Corp [1999] Lloyd’s Law Reports 343, Longmore J went the other way, but the point does not seem to have been fully argued. The correctness of the Aneco decision has been questioned in a recent update of a text-book on reinsurance law. However, on the evidence, the expectation of the market is clear: the line goes down on the basis that there has been no material misrepresentation to the lead underwriter; if the lead underwriter is entitled to avoid the policy, so must the following market be entitled.

In summary, therefore, I have reached the following conclusions: